The announcement doesn't come as a shock, because the two had announced in January they were studying the possibility of a combination. They already have extensive business arrangements together. Redhook brews Widmer beers under license, and for three years the two have had a west-of-the-Mississippi joint marketing venture called Craft Brands Alliance.

But combining the two brewers into one company will give the two more marketing muscle and make better use of their three breweries. "Operating as two separate companies, it's more complicated," said Redhook Chief Executive Paul Shipman. Operating as one is "more straightforward, more organized."

It might also help the craft-beer segment boost its share from 6.5 percent nationally to the percentages seen in the Pacific Northwest.

Said Kirk Widmer, noting that craft and specialty beers command 15 percent of sales in Portland and 10 percent in Oregon: "I don't see why the rest of the country can't close the gap."

The new company will continue to trade on the Nasdaq stock market under Redhook's existing symbol, HOOK. The combined company will have headquarters in Portland but will have management offices in Woodinville. The deal could be complete by the first quarter of 2008, pending regulatory and shareholder approval. Redhook will swap about $50 million of its shares for those in privately held Widmer.

Widmer was the 11th-largest U.S. brewing company in 2006 as ranked by sales, while Redhook was 12th, according to data from the Brewers Association; combined, the companies have annual sales of about $110 million. Widmer Hefeweizen, Redhook ESB and Redhook Ballard Bitter India Pale Ale rank among the nation's 15 most popular craft brands.

Widmer has a brewery in Portland, and Redhook has breweries in Woodinville and Portsmouth, N.H. Widmer, which is at capacity now, has an expansion project ready to come on line and space available for further expansion. Redhook's Woodinville brewery is at capacity, Widmer added, but Portsmouth still has room to expand. Beyond that, the combined companies might look at a new brewery in the center of the country, he said.

Both Widmer and Redhook emerged in the early days, and helped fuel the growth, of the craft brewing movement, which was characterized by small, regional independents producing more flavorful beers than the mass-market brands.

Consolidation swept the major brewers; the number of traditional breweries fell from 175 in 1960 to 21 in 2005, and the casualties included Rainier in Seattle and Olympia in Tumwater. But the specialty category grew from just two breweries in 1979 to a peak of 1,626 in 1998, before declining to 1,346 in 2005.

Redhook went public in 1995 at $17 a share, and for a brief time, the stock soared as high as $35. When craft brewers fell out of favor and Redhook reported disappointing results, its stock slumped to barely $1 a share. It closed in trading Tuesday, before the announcement of the Widmer deal, at $6.10.

"The market overembraced us at the beginning; then they threw us out with the bath water," Shipman said.

Craft brewers still face challenges, including soaring prices for barley malt and hops. In the third quarter, Redhook reported a loss of $289,000, or 3 cents a share, compared with a profit of $364,000, or 4 cents a share, in the year-ago period; sales rose 15 percent to $11.1 million. Shipman believes a larger, unified company will be in a better position to deal with that problem.

The nation's largest brewer, Anheuser-Busch Inc., holds a one-third share in both Redhook and Widmer and will still have a stake in the new company.

Widmer and Redhook have about 400 employees. The companies said there will be some overlap in such operations as accounting and finance, affecting less than 5 percent of the combined work force.

Kurt Widmer, who with his brother Rob founded the namesake brewer in 1984, will be chairman of the combined companies, while Shipman will be chairman emeritus. The new company will be run by co-chief executives: Dave Mickelson, Redhook's president and chief operating officer, and Terry Michaelson, currently president of Craft Brands Alliance.

"I am going to help in any way I can," Shipman said. "I am there to cheer on the guys who are driving the bus."

Shipman, 54, said he might have at least one more venture ahead of him. "I expect to be a busy man in the alcoholic beverage business, but not the beer business," he said.